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Topic: ADS - Alliance Data Systems (Read 77133 times)

My take from reading the conf call: ValueAct sold because of the 10% treshhold which is very annoying. They told the CEO they were happy at the actual level and would not sell more.The CEO gave a 'profit warning', saying that results would be disappointing (flat) until the second half of 2019. From then on +15% and 2020 +20%. So, what should have happened in the second half of 2018 is delayed by one year. It is clear that they have retailers that are really suffering and they have decided to get rid of them. There are many new signings which should replace the old clients. Epsilon, chances are high something will be done during the first quarter. BrandLoyalty is also for sale at the right price. So, all in all a very nice cash machine at a very nice price. But business has evolved and they have to adapt.

My take from reading the conf call: ValueAct sold because of the 10% treshhold which is very annoying. They told the CEO they were happy at the actual level and would not sell more.The CEO gave a 'profit warning', saying that results would be disappointing (flat) until the second half of 2019. From then on +15% and 2020 +20%. So, what should have happened in the second half of 2018 is delayed by one year. It is clear that they have retailers that are really suffering and they have decided to get rid of them. There are many new signings which should replace the old clients. Epsilon, chances are high something will be done during the first quarter. BrandLoyalty is also for sale at the right price. So, all in all a very nice cash machine at a very nice price. But business has evolved and they have to adapt.

It is my opinion that the stock continues to sell off cause we are going on 3 years of mgmt continuing to get shareholders hopes up of better business performance and then falling short. A couple times it was because they didn't communicate properly and other times they were just dead wrong. I have witnessed something similar with Mike Fries at Liberty Global, the market does not like it when your optimism is unwarranted and when guidance is wrong. This time I think it is Valueact forcing them to steer the ship into short term pain and long term gain . It was only 1 quarter ago that mgmt started talking about pro actively shedding some clients, which I think is very rare and the right thing to do. But it comes after 2.5 years of shareholders being disappointed.....its just a bad time to take on self inflicted shortfalls but something I think is entirely appropriate. I can just imagine what the board meetings looked like in the last year......." Jesus Christ Mason, the shareholders are gonna have our freaking heads if we purposely lower our customer base and earnings, we've had subpar performance for 2 years and my bullshitting is working anymore". "I dont give a damn Edward, you should have just told them the truth all along rather than bullshit them, this way when inevitable short term bad news arrives the shareholders will be understanding"!!

If it’s just a communication issue, ADS would be a great bargain. I am very sceptical of 15% growth predictions in credit card accounts late in the cycle. Leverage is already pretty high (tangible book is negative as another poster pointed out) and Epsilon has been struggling for a while since 2014 and now it’s top line is shrinking. Is this a melting icecube? 9x EBITDA might be achievable, but a good partner the proceeds will have to go towards debt reduction, IMO. The sale of Epsilon will recur their capacity to carry debt quite a bit.

I don’t see a Slam dunk stock here, but I agree, if you believe the management project on adjusted earnings and growth, this is very cheap here.

Haven't their buybacks and acquisitions impacted tangible book value? Not sure it's the right metric for ADS.

$5B for epsilon? Would be nice but is it realistic? I think the market would react very very positively to any number above $3.5B. The challenge is epsilon has been challenged for sometime and buyer knows ADS needs to sell. Also the buyer will likely have to sign a TSA or other long-term contract with card services likely limiting true profitability of epsilon.

Don't understand why they differentiating between active accounts and voluntary cancellations. At the end of the day - revenue depends on total receivables. If you signed shitty retailers that you are now culling, you don't get to pretend they don't exist and growth is actually higher.. the revenue is the the revenue. This massaging of numbers does not help management credibility - which is already low given constant promises of turnarounds and credit mishaps.

Still think their announcement on Q3 call of upcoming strategic announcements was fool hardy given they hadn't even started the sale process. All it did was raise expectations and further cemented market view that this is a very promitional managemt team that can't be trusted.. bSeems like they were trying to open a window for insider sales by releasing all information they had.

Haven't their buybacks and acquisitions impacted tangible book value? Not sure it's the right metric for ADS.

$5B for epsilon? Would be nice but is it realistic? I think the market would react very very positively to any number above $3.5B. The challenge is epsilon has been challenged for sometime and buyer knows ADS needs to sell. Also the buyer will likely have to sign a TSA or other long-term contract with card services likely limiting true profitability of epsilon.

Don't understand why they differentiating between active accounts and voluntary cancellations. At the end of the day - revenue depends on total receivables. If you signed shitty retailers that you are now culling, you don't get to pretend they don't exist and growth is actually higher.. the revenue is the the revenue. This massaging of numbers does not help management credibility - which is already low given constant promises of turnarounds and credit mishaps.

Still think their announcement on Q3 call of upcoming strategic announcements was fool hardy given they hadn't even started the sale process. All it did was raise expectations and further cemented market view that this is a very promitional managemt team that can't be trusted.. bSeems like they were trying to open a window for insider sales by releasing all information they had.

Good post Abit, Spec, when they say 15% growth I believe they mean over a period of years. Kind of hard to fault them for being at the top of the cycle....funny how this 15% is one of the only things that mgmt will be right on imo

My concern is that the recent problems might be symptoms of the fact that it is running out of businesses that are a close market fit for its services.

Why did they target specialty retailers and not some other segment? I would argue it has to do with consumer behavior. Store cards benefit customers (invariably women) who shop frequently at their favorite stores which adds up to significant savings. The cards also benefit retailers who can target these same frequent shoppers to buy more vis targeted marketing.

ADS essentially followed a niche strategy that is based on serving specialty retailers. This is a market they served better than the Citigroup’s and Capital One’s of the world.

The retailers ADS targets have only a transactional relationship with their consumers and hence need ADS to help them with marketing. Online only and digital businesses have a relationship (via an online account) that makes ADS much less useful to them.

Businesses that are not retail are not a good market fit for ADS. They signed up Wyndham this year. I just cannot imagine how a hotel chain could be a good fit. It assumes that people would fly out to a distant city, make a hotel reservation by providing an existing credit card and then apply for the hotel card after they get there. It goes against the grain of how consumers behave. This applies equally well to Digital/eCommerce only businesses.

ADS attempt to move away from “mall-based specialty apparel” only reinforces the suspicion that it might be close to hitting the limits of its addressable market. As it signs up larger retailers, the economics would be much less favorable to ADS.

If you look at their growth strategy and management has laid this out pretty well. When they onboard a retailer, the 3-4% same store sales growth for the retailer, translates into a 3-4% growth for ADS as well. Now, they typically are starting from zero at the retailer, since the retailer does not have a store card in place. ADS would get this to say 10-20-30% of their customer base and this translated into another 3-4% growth. New retailers who they sign up then generated a further 5-6% growth on top.

The growth math above stops working at some point and the problems facing their end customers (retailers) could mean they are getting closer to that point.

The concern is around management ability to recognize when their business turned into a cash cow and allocate capital appropriately. Management believes they still have a long runaway to growth. So this could be an issue.

Anyway, ADS reminded me of a mistake I made a couple of years ago and the similarities are striking. So I decided to pass up unless I am able to address my concerns mentioned above.

1. Having a niche strategy means limiting yourself to a particular market segment. You get to have high returns on capital but the size of your market is small. This is the reason why we do not see Citigroup and Capital One not playing much in this market. They are going after a much larger market.

2. A companies initial customers are going to those would are a good product market fit. As the company grows, the customers are going to be less and less a fit for your product. This increases the marginal costs to serve these customers and reduces the return on capital.

I am trying to figure these out for ADS. Where is the boundary for ADS as far as product market fit is concerned?

ADS attempt to move away from “mall-based specialty apparel” only reinforces the suspicion that it might be close to hitting the limits of its addressable market. As it signs up larger retailers, the economics would be much less favorable to ADS.

I think your concerns are valid but isn't a better explanation that mall-based retailers are in secular decline? ADS is trying to grow receivables at 15% per year and to do that, they can't be signing up new retailers that are shrinking.

You realize that they have digital loyalty cards right? Go to wafair.com and put something in your cart & try to check out. You'll see an option to save x % by signing up for their loyalty card ( that's ADS ).